Confidence in the Fed Keeps the Market Running Higher

The market experienced a spike in volatility on Monday afternoon when Fed Chair Jerome Powell commented that another half-point interest rate cut was unlikely in 2024. The market quickly recovered and closed near the highs of the day after Powell made it clear that the Fed is optimistic about both the economy and inflation.

What continues to drive the market is a Goldilocks economic narrative. There is a widespread belief that the Fed has succeeded in engineering a soft economic landing. Inflation has been defeated, and the economy is slowing but still robust.

The bears are focused on the potential for a rebound in inflation and more severe economic slowing, but so far, there are no signs of that occurring. Few market players believed that the Fed would be able to deal with inflation in such an effective manner, but that does appear to be the case.

The bears are also focused on extended technical conditions and high valuations. Many of the pessimists thought that negative September seasonality would deliver a much-needed technical correction, but it never really materialized. Instead, the bears produced additional fuel for the upside as shorts were squeezed, and FOMO took hold.

Technical conditions and valuation will be tested again as third-quarter earnings reports start to roll in in a couple of weeks. With the indexes near highs, expectations are elevated, and the risk of sell-the-news is high.

I’ve been overly cautious recently and have a very high level of cash. I have not found technical conditions favorable and have not been making many new purchases. 

While I have no interest in trying to short this market, I’m finding it very hard to put more cash to work. My game plan is to continue to monitor positions carefully while hunting for new opportunities.

At the time of publication, Rev Shark had no positions in any securities mentioned.